Money has three functions; one is as a numeraire, a unit of account, to quote prices, the second is as a medium of exchange and the third as a store of value. The headline quote is from a visionary who saw the ill effects of hoarded cash during his time in Argentina in the 1890s. Silvio Gesell witnessed a massive economic crash in Argentina. Gesell was convinced that the two of the functions of money were in direct conflict, the store of value versus the medium of exchange. During crises, people hoard money without spending it. Without money changing hands, business grinds to a halt, causing poverty, unemployment, stagnation. Gesell witnessed starvation, privation and poverty under conditions of plenty.
Gesell’s solution to this was a proposal to impose a stamp tax, that cash becomes worthless unless it is renewed periodically through a stamp upon the notes. The stamp had to be paid for by giving a certain amount of that cash to the authorities. Essentially a negative interest rate that breaks the Zero Lower Bound (ZLB) on cash. Obviously, people with a lot of money saved up objected to this vehemently. This radical solution found adherents among economists, including some of the masters of economic theory. In fact, many current measures adopted by the central banks bear the stamp of Gesell.
Use It Or Lose It
The main concept, “use it or lose it” tries to balance the store of value with the stimulation of the economy with the free spending of cash, discouraging hodlers. If you want potatoes not to rot, you make potato salad and eat it or feed your neighbors. If you want iron not to rust; you temper it and beat it into plowshares. You can also work the land with these plowshares, plant the potatoes and be left with more potatoes for the next year. This would be equivalent of investing your money.
The phenomenon of poverty amidst plenty has been studied in many settings. Quantitative Easing (QE) programs increases the money supply, through making money cheaper. The corresponding rise in inflation which is the bogeyman has not materialized. Pointing to Venezuela or Germany between the wars or Zimbabwe as cautionary tales only serve to show how rare runaway inflation is. It is usually due to a combination of factors, not just the availability of cheap money. Inflation also saps the buying power of static cash, a negative rate in effect. Gesell’s suggestion is much more drastic.
Hot money is a term usually reserved for international money movements sparked by differences in short term interest rates. The heat derives from the fact that the money can be moved rapidly, usually because of the liquidity of the underlying investments.
In the context of demand stimulation, there is another definition. Due to huge negative interest rate on certain types of money, the money cannot be stored away. If the government distributes stimulus money with stipulations attached; for example, it has to be spent in certain ways and within a certain period of time otherwise it expires. This can be thought of as hot money. Just like a hot potato. You have to pass it on, spend it and revive the economy.
Central Bank Digital Currencies Juicing The Economy
If CBDCs existed, stimulus payments could have been made with the proviso that they would become worthless within a certain period unless spent on food, rent or other targeted needs. Since CBDCs are programmable, this can be done through a multi-token standard, where the stimulus payments would carry an expiry date and strict control on where the stimulus can be spent. Such forms of money exist today, like food stamps in the US or gift cards that expire. Distributing stimulus to the poor who do not have access to stored cash in a time of unemployment ensures that they spend it. But what about people who have funds, who can still get a pandemic loan or a stimulus payment who hoard the cash without spending it? Programmed hot money features can increase retail demand and stimulate the economy. Of course, in a blockchain based approach, this would be through smart contracts with variable token definitions.
The other channel to transmit monetary policy would be through negative interest rates. Gesell’s name often comes up in this context. This is definitely possible in CBDCs. All CBDC discussions in policy and academic circles include possible variable interest rates as features. The ZLB on cash would still exist, but cash is costly to issue, distribute and hold. Maybe even cash can come with an expiry date a la classic Gesell.